Current Issues and Potential Solutions to Take Blockchain to the Next Level

If you have followed this book thoroughly so far, you should have a pretty good understanding of what blockchain technology is, how it works, and its applications and use cases. Perhaps you are excited about the disruptive potential of this new technology with all its incredible advantages. Ready for this brave new decentralized blockchain world? Well, not so fast, we are not quite there yet. There are some critical issues that need to be resolved first. In this chapter, we will be addressing those issues and finding potential solutions to them.

We will cover the following topics in this chapter:

• Issues faced by blockchain
• Solutions for scalability issues
• On-chain solutions
• Off-chain solutions
• Solutions to other challenges
• Next generation blockchain projects
• The exciting world of blockchain

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Issues faced by blockchain

Decentralized systems are great in many aspects, but they are inherently disadvantaged versus centralized systems in the important aspects of scalability and governance. Running consensus among all nodes on the network just takes too much time and energy. Contrast this with a network with just one central server. Surely it will run faster? But we have already discussed the disadvantage of the central server model: it has a central point of failure. Therefore, there is a trade-off between scalability and speed on one hand, and security on the other hand.

Scalability

Blockchains, at present, are notoriously slow compared to centralized payment processing networks, such as Visa, Mastercard, and PayPal...

Solutions for scalability issues

First and foremost, blockchains need to address the scalability issue.

What do we mean exactly by scaling in the context of blockchains? A core security feature, but also a capacity limitation, of public blockchains such as Bitcoin and Ethereum is that their protocols require every transaction to be processed by every single full node in the network. Every operation that takes place on the blockchain, such as a payment or a deployment of a smart contract, must be replicated by all full nodes. This is what makes public blockchains secure, autonomous, and decentralized at the same time. Participants don't have to rely on someone else to tell them what the current state of the blockchain is; they figure it out for themselves.

This puts a constraint on a blockchain's transaction throughput. It cannot be higher than the processing capacity...

On-chain solutions

As we saw in the preceding sections, on-chain transactions can be pretty cumbersome. For this, we will use the following solutions.

Proof-of-Stake

In this book, we have presented two consensus algorithms: Proof-of-Work, and Proof-of-Elapsed Time:

As we learned, consensus algorithms need to be suitable for the ecosystem they support. And there is a big difference between what is suitable for an open permission-less public blockchain, such as Bitcoin and Ethereum, and a private permissioned blockchain framework such as Hyperledger. The difference stems from the need for trust in the system, or lack thereof. Different levels of trust call for different consensus algorithms. Therefore Proof-of-Work is suitable...

Off-chain solutions

Layer 2 solutions are built on top of the main blockchain infrastructure. They do not require changes to the base level protocol; rather, they exist simply as smart contracts that interact with off-chain software. We will learn about some of these solutions in the following sections.

Payment or state channels

Payment or state channels are one of the more established blockchain scalability solutions. The idea is to use side channels or chains for processing transactions off the main chain. Once transactions on the side chain are processed and the state of the channel is finalized, it is written back on the main blockchain, as shown in the following diagram:

In this way, a lot of the transaction processing...

Solutions to other challenges

Besides scalability, there are several other dimensions in which blockchain technology is evolving and upgrades are being developed.

Interoperability is a very important area, which is the focus of many research and development efforts. Various mechanisms for building bridges between different blockchain protocols are currently being tested. These include the so-called atomic swaps, decentralized exchanges, and inter-chain communication protocols, as shown in the following diagram:

Atomic swaps represent a direct trade of cryptoassets belonging to one blockchain, such as Bitcoin, to cryptoassets belonging to another blockchain, such as Litecoin. This is done on-chain, as opposed to the majority of popular cryptoasset exchanges, which match and settle transactions off-chain, such as standard financial exchanges. This or other direct cross-chain transaction...

Next generation blockchain projects

Besides the upgrades in Bitcoin, Ethereum, and other established blockchains, there are many exciting new projects coming along and trying to build the blockchain of the future.

We briefly mentioned Tezos. It is described as a generic self-amending cryptographic ledger. This means that it deploys a decentralized consensus mechanism, not only for transaction validation and updating the state of its blockchain, but also on how its protocol and network are governed and evolve over time. To do this, it plans to deploy a delegated Proof-of-Stake consensus algorithm and to split its blockchain protocol into three distinct layers:

• A network protocol in charge of broadcasting transactions across its network
• A transaction protocol, which defines the criteria that make a transaction valid
• A consensus protocol that specifies how a consensus is reached...

The exciting world of blockchain

We can now draw a conclusion here that blockchain is an exciting new technology, which is still in its infancy and naturally needs to resolve some issues and mature before it reaches mass global adoption. Blockchain has become one of the most hyped technologies in a very short space of time. There is a lot ongoing innovation in the blockchain space taking place at an accelerated rate. This new field has managed to excite a lot of smart people, which see enormous opportunities opening up. Talent and money are flowing in with strong momentum from all parts of the world.

Resemblance to previous disruptive innovations

The trend is similar to what we have seen in previous industrial revolutions...

Summary

We hope you have enjoyed this amazing journey through the world of blockchain. Our mission with creating this book was to try and increase awareness and understanding of blockchain technology, and its useful applications, benefits, and challenges. This new distributed computing technology represents an exciting innovation, holds a lot of potential, and shouldn't be dismissed easily due to the boom and bust cycle of publicly traded cryptoassets. It is also impossible to cover everything going on there right now. Blockchain is at a very early stage, and at the same time is evolving so quickly that new, interesting technological and business developments come up almost every day. We believe that blockchain technology is here to stay and expect to see some new major breakthroughs soon.

May Satoshi and Vitalik be with you! Thanks for sticking with us to the end!

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